Reduce income tax

China Daily, April 21, 2011

The draft amendment to the Personal Income Tax Law hardly amounts to a sufficient policy response to address the urgent need to boost domestic consumption.

Chinese legislators who deliberated it for the first time on Wednesday should make it clear to policymakers that more tax relief is needed if they are serious about setting in motion a lasting domestic consumption boom.

To facilitate the transformation of China's development model toward consumer-led growth, the government has vowed to do whatever it can to encourage its people to spend more.

The proposed rise in the minimum threshold for personal income tax is the latest government effort to reduce people's tax burden, especially those of low-income households, in an attempt to enhance the public's purchasing power.

However, the drafted increase in the minimum threshold for personal income tax from 2,000 yuan ($305) a month to 3,000 yuan a month is far from enough to deal with the challenge of inadequate consumption.

On the one hand, the upward adjustment of the minimum threshold is late in arriving; the average burden of monthly expenditure for each urban worker was 2,167 yuan last year. The existing tax rule means people who could barely manage to cover their living expenses also had to pay personal income tax.

On the other hand, the new minimum threshold looks too shortsighted to take into consideration the country's ongoing rise in incomes. The authorities have promised to double the national wage level in the next five years. If that is the case, the proportion of taxable wage earners, which the minimum-threshold hike is supposed to substantially cut, will rebound sharply unless legislators rush to raise the level all over again.

While the caution of taxation officials is understandable, inadequate tax revenues will restrict government expenditure in support of economic growth and improving people's livelihoods and undermine the country's preparations for uncertainties.

What is less understandable is replacing affordable and necessary tax relief with piecemeal reform that will do little to encourage Chinese consumers to loosen their purse strings.

According to the Ministry of Finance, the latest income tax law amendment will save an estimated 120 billion yuan for Chinese consumers this year compared with 2010. Yet, the 33.1 percent year-on-year surge in the country's fiscal revenue to 2.61 trillion yuan in the first quarter shows that the government can well afford more general tax relief for all wage earners.

The Standing Committee of the National People's Congress should ask those who drafted the amendment to explain how such a meager personal income tax cut will make it possible to raise the country's extraordinarily low consumption share of gross domestic product.

The tax authorities should be urged to come to grips with the urgency of boosting not the national coffers but domestic consumption.